Building Wealth: 6 Ideas to Help Turn Your Pennies into Benjamins

Let’s face it: When it comes to money, everyone wants more of it. Unfortunately, few people really understand what they need to do to earn it. Sure, landing a better job or getting a raise will boost your income. That’s great, but a small bump in your paycheck usually isn’t enough for building wealth on its own.

Instead, it’s more important to learn how to properly handle the resources you currently have at your disposal – money and time.

Are you ready to turn your pennies into Benjamins? These 6 ideas will help get you started.

Building Wealth with Residual Income Streams

If you’re serious about building wealth, you’re going to need to start investing. If you’re new to the idea, this concept can seem pretty overwhelming.

So much of the available information on investing is filled with gobs of jargon and complicated advice that’s hard to digest. If that describes how you feel, don’t worry.

What is Residual Income?

Residual income is income earned on a recurring basis, often as the result of an initial investment of money and/or time.

So, in the context of investing, you contribute money into your investment account and the value grows over time. It’ll grow a lot faster if you make regular contributions, of course; but, even if you don’t, that initial investment will grow. Why? Because of a magical thing called compounding.

The initial money invested is called the principal. The principal then grows (in the form of interest or dividends), and that growth is reinvested back into the original investment. The next cycle of growth will pay interest and/or dividends on both the initial principal + that first round of growth – so, you’ll earn even more than you did during the first cycle. That growth is again reinvested, and the cycle continues. In a nutshell, that’s compounding.

Time is More Valuable than Money

Do you see how you don’t have to do anything other than invest the initial money to earn even more? The income you earn after that initial investment is residual income, and it’s super important to building wealth.

No, for real. You only have 24 hours in a day, and you need to spend at least a few of them sleeping. So, relying solely on exchanging your time for money (which is the situation in most jobs) is limiting to building wealth. At a certain point, your earning potential plateaus.

With residual income, you aren’t trading your time for money. Instead, you’re earning that income in your sleep. That frees up more time to invest in other income-generating activities.

Other Sources of Residual Income

There are other ways to build residual income streams, too. You might consider:

That’s not to say these are sources of easy money. They often require an upfront investment of hard work! After that, they can generate a relatively steady stream of recurring income. And recurring income is your friend.

Ditch Debt

This should go without saying, but if you’re serious about building wealth, you need to get out of debt. The exception here might be a modest mortgage.

If you currently have debt, you need to build debt repayment into your budget. Prioritize paying down your high-interest debts first. Then, use the extra cash flow to attack whatever’s remaining.

Once all of your debts (besides your mortgage) are paid, you'll have increased cash flow. And guess what you can do with that recovered cash? Pump it into savings and investments!

Pay Yourself First

Saving and investing is most effective when done consistently over time, which only happens when you make it a regular habit.

To make sure you establish healthy saving habits, I recommend paying yourself first.

This means building contributions to your saving and investment accounts into your budget and automating them.

Second, you’re automating your contributions so that – on payday – money moves directly from your checking account into your savings and investment accounts. Automation makes it super-easy and eliminates that chance that you might forget to do it…or spend the money on something else.

Invest in the Stock Market

Even if you have healthy saving habits and are participating in your work’s 401(k), you might be intimidated by the stock market.

I don’t blame you. The truth is that most people don’t have the knowledge necessary to start buying and trading stocks with the goal of beating market returns. In fact, some investment gurus argue that consistently beating the market just isn’t possible.

I’m not trying to discourage you. If you have some “play” money and always wanted to try buying your own stocks, then have fun. But, if you’re just getting started or you’re not comfortable with that, there are other ways to invest in the market and (hopefully) win over time.

Index Funds

Index funds can be a great way to invest in the market and generate a residual income stream, helping to grow your wealth over time.

An index fund is a portfolio of stocks designed to mimic the performance of an index (think the S&P 500 index) rather than beat it. In fact, Warren Buffett has famously stated that he thinks these types of funds are the smartest choice for the average investor.

One of the things that make index funds attractive is that they tend to have lower fees than other types of funds. This is because they aren’t actively managed. Fees eat into your returns, so the lower the better.

Start your Own Business

Looking for a way to increase your income so you have more to invest? Starting your own business might be an option.

Most people aren’t going to quit their day job and start up a new business tomorrow, and that’s probably for the best. Still, anyone can start a side hustle.

If you spend all your extra cash on an inflated lifestyle, you won’t be any wealthier. But if you pump most of your side hustle income into your investment and savings accounts, you’ll see a real boost in growth over time.

Which of these ideas have you tried? Let us know in the comments!

Greg Johnson is a personal finance and frugal travel expert who leveraged his online business to quit his 9-5 job, spend more time with his family, and travel the world. He is the co-owner of the popular blog Club Thrifty, where he teaches others how to spend less and travel more.